Glossary - Sweat Capital
Sweat capital refers to the value of the work and effort put in by the founders and early employees of a startup company. This type of capital is considered an intangible asset as it is the time and skills contributed towards the company's growth in lieu of monetary payment. It is often recognized in the form of equity ownership or options in the company.
Also known as
- Sweat equity
Use cases examples
- Founders' Agreement: The Founders hereby acknowledge that their initial contributions in the form of sweat capital shall be valued at a predetermined amount, which will be converted into shares of the company's common stock.
- Equity Compensation Plan: Employees participating in this plan will receive equity compensation as recognition of their sweat capital, reflecting their commitment and contributions to the company's development and success.
Considerations for investors
- Assessing the actual value added by the founders' sweat capital to determine the startup's pre-money valuation accurately.
- Understanding the terms under which sweat capital is converted into equity to gauge the potential dilution of shares and impact on investment.
Considerations for founders
- Evaluating the fair valuation of sweat capital contributed by each founder and early team members can be complex but essential for equity distribution.
- Documenting all contributions meticulously to ensure transparency and avoid future disputes over equity allocation.
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